Big Interview: The long and winding road

It's been a tough couple of years for Essendant since its big rebrand in 2015. As the second CORE Live, recently held in Las Vegas, firmly demonstrated, transformation is the name of the game and that goes for the wholesaler as well as independents â

Disruption, distraction and opportunity were three words discussed in great detail at Essendant’s biennial CORE Live event that was recently held in Las Vegas. And while these words apply to the industry as a whole and the independent channel in particular, they also have great relevance to the wholesaler very specifically.

OPI CEO Steve Hilleard caught up with Essendant CEO Bob Aiken and President of Office and Facilities Harry Dochelli at CORE Live to chart the wholesaler’s most recent history and the challenges it has faced, internally as well as externally.

OPI: Bob, you became permanent CEO of Essendant back in July 2015. It’s been a pretty bumpy ride over the past couple of years in terms of financial results [Editor’s note: the interview was conducted before Essendant’s most recent Q4 and full-year results]. Can you comment?

Bob Aiken: Well, it will be two years in May that I’ve been serving in the CEO role. We worked hard during that time to really understand where the market is going and how to continue to define our value proposition in a way that helps our resellers win. The ‘Powering Possibilities’ branding (that we’ve just launched here at CORE Live) reflects what we think it’s going to take to win in the future. By that we mean Powering Possibilities for our resellers’ businesses with smarter operations, category expansion and digital and marketing support. Those are the new table stakes in our industry.

The landscape is shifting in office products and in facilities today, and we’ve seen the impact of those shifts in our own business as well as in the businesses of many of our customers.

Every business today has to evolve in the face of the growing presence of e-commerce and when I joined Essendant I knew that we are no exception. The traditional wholesaler model of being all things to all people isn’t sustainable any longer and we’ve spent the past 18 months defining principles by which we’re going to operate the company going forward.

OPI: Gross margin declines seem to be a particular issue for Essendant. How can you rectify that?

BA: When we look at the trends in the business, what we see is that larger customers are growing and smaller customers are declining. The mix of products we’re selling is also shifting. How do you address both?

One of the things we’ve looked at very carefully is our assortment and whether we’ve optimised that. Are we partnering with our suppliers in ways that drive value for them? Are we carrying the right items to meet the needs of end users? Do we have the right levels of inventory in the right places?

As we work to improve the gross margin of our business, we’ll be primarily engaging with the suppliers that we believe offer the best opportunities in the marketplace. We’re also partnering with our customers – if we’re selling more of the right type of product to the right customer, margins will improve.

OPI: How supportive are your shareholders of the initiatives you’re undertaking?

BA: Well, like any public company shareholders, they’re interested in both how the business is performing financially as well as the long-term strategies that will make it successful over time. We’re fortunate at Essendant to have a number of large, very long-term shareholders that understand our business well. We’re having the same conversations with our shareholders that we’re having with our customers and suppliers about our strategies.

I believe generally they are happy with the focus we’re bringing within our core categories to strengthen our position. Over time, those strategies will deliver good financial results for us.

Despite the undoubtedly “below expectations” financial results we’ve had, it’s important to remember Essendant is still a highly profitable company and we generated a lot of cash flow. We’ve never invested more in our distribution network and IT systems than we have this past year and we’re investing for the future.

OPI: At the last CORE Live event in 2015, the two big announcements were the rebranding from United Stationers to Essendant and the transition onto a common operating platform of both parts of the business (Facilities Essentials, formerly Lagasse, and Business Essentials, formerly USSCO). The first seems to have gone very well, the second not quite so from what I can gather. Can you tell me a bit more? Are you winning back some of the business that you lost during that difficult period?

BA: As we put these two businesses onto a common operating platform there’s a lot that we got right and that went very well. But there were some aspects of an office products-centric operating model that weren’t as well suited to our jan/san distributors, so we’ve had to go back and make enhancements to our system to make sure we’re meeting the needs of both OP dealers and jan/san distributors.

The good news is that we’ve made solid progress on this front. We measure our customer experience through a net promoter score concept and we have seen really rapid improvement across all of our customer segments.

The original vision was one order, one shipment and one invoice across a range of categories to allow cross-selling and we’re going to realise that vision. We stumbled a bit, but our customers have been patient with us and now we’re ready to deliver on the promise that we made when we started.

OPI: Bob, you made a statement [on stage] saying it’s not been an easy ride and that you didn’t understand your jan/san customers maybe quite as well as you should have done. That’s quite an admission when you’re talking about a $1 billion company that wasn’t at all a new business for you…

BA: Maybe, but that comment had largely to do with the common operating platform we implemented. Yes, there’s a blurring of the channels taking place, but you have to be respectful of the fact that across the spectrum of jan/san distributors there are varying ways in which they do business.

We have to have the flexibility in our operating platform to meet and address those varied customer requirements. It’s a learning curve and it was steeper than we anticipated.

Harry Dochelli: CORE Live is a great example of the blurring channels that Bob has just mentioned. We have everything from jan/san distributors and office products dealers to e-tailers here. Combining all those on one platform is difficult. We literally lifted up a $1 billion company and put it on a new platform.

We’re in a channel that frankly was – and maybe still is – reluctant to change its ways. But a lot of our customers are now asking us to go beyond great distribution capabilities; they’re talking about vertical markets, about our digital marketing experience, about online expertise, etc.

So as bumpy as the ride was, we’re now in a strong position from which to move the business forward. For our office products folks, we can now give that billion dollar jan/san category expertise to them and we can do it well – that’s a good place to be in.

OPI: With the benefit of hindsight, how much of a distraction was the Staples/Office Depot acquisition saga and of course your involvement with the agreement that was announced with acquiring the Staples contract assets?

BA: I believed all along that a merger of Staples and Office Depot would have been good for the industry because consolidation in an industry that isn’t growing is a way to keep it healthy and vibrant, and take costs out of the system. When the merger ultimately didn’t go through, you saw a lot of changes in the industry unfold quickly. It turns out that the Amazon threat was real. Seeing all that has certainly caused us to re-evaluate how we can be successful across our different customer channels. The game has clearly changed.

The independent channel is built very much around the broadening of categories, with the belief that dealers will want to carry a broader range of products around digital and online capabilities and around the ability to deliver anything from a full truckload to a single item in a cost-effective way. 60% of what we’re selling now we’re putting in a box for either last mile distribution by our customer or we’re drop-shipping directly on their behalf.

We’re evolving our model just like many other businesses are – I think the merger, even though it didn’t happen, has focused the mind in terms of what our industry will look like in years to come.

OPI: Consensus at the time was that the market – and you just alluded to that as well – needed some consolidation. To what extent can both companies survive in the medium to long term without some form of transformation, acquisition or other major strategic shift?

BA: In an industry where end-user demand isn’t growing it’s imperative to expand the categories we’re bringing to market – that’s going to be the key for all of us. For Essendant specifically it means expanding in breakroom, expanding in foodservice and driving our jan/san offering.

OPI: But what about Depot and Staples specifically – can they survive without some sort of major event happening?

BA: Staples has a very solid strategy and a focused leadership team. They’re executing on their strategy and I think they’re well-positioned to be successful. Depot has just had a new CEO coming in and he’s going to take some time to figure out what his priorities will be, so it’s too early to say how that company will fare moving forward.

OPI: That’ll be another couple of years lost then. Sticking with Staples and Depot, were you surprised that both of them decided to focus their attentions on North America as well as specifically on the SME sector?

BA: I wasn’t surprised at all to see them focus on the North American market. This is a business where scale really matters. Both companies have scale in this space and 25% of the world’s economy is still concentrated in North America.

With regards to their focus on the SMB space, Staples and Office Depot have a large presence in the enterprise accounts sector today and for them to continue to grow they’re going to have to look at the SMB space.

HD: I think it’s a smart move to focus on North America and to concentre on how they can be better here. As far as the SMB market is concerned, specifically for Depot it was already core to their business together with the government business. When they bought OfficeMax they added the large enterprise accounts business. Staples also was already strong in the SMB sector. It’s not so much a new phenomenon, but more a renewed focus.

OPI: Harry, you spoke at CORE Live about the disruption that we’re going to see as a result of OfficeMax now being properly integrated into Depot, and of course both Depot and Staples having relatively new CEOs. Will that disruption benefit the independent dealer community?

HD: Well, we just talked about our own platform and the integration issues we had. It’s a challenge for any business of that size to move over to a new platform, no matter how well you execute it. OfficeMax and Depot are not going to be any different – they’ll have their challenges and these will create opportunities in the marketplace and for other operators.

We’re focused on the winners in the marketplace and we believe independent dealers are those winners. They execute well, they are capitalising from any disruption and they are taking market share.

I believe the top 50 US independent office products dealers are pretty healthy – they are growing in a declining market and that means they’re grabbing market share.

BA: The number one focus of these top 50 dealers is on enterprise accounts and I think you’ll see a real share shift in the next 12 to 18 months.

OPI: That brings me to your Vertical Markets unit which helps independents win business in the enterprise and public sector accounts segments. You’ve been very successful with that I believe. Can you tell me a bit about that?

HD: Yes. We’ve built this business unit to well over $200 million in the past five years. It again speaks to when there’s disruption in the market there’s also opportunity. We started in the federal state and local government business and have expanded into healthcare. We are also focusing on enterprise accounts.

Our progressive dealers are capitalising on our new capabilities. These are markets they haven’t traditionally played in and they’re now participating in those bids with our help.

It’s a different mindset and outlook, but our larger dealers see this as a window of opportunity. It’s one of our key strategies to help growth and we’ve been up in the double digits with this group consistently for the past few years. Importantly, we don’t see it slowing down either. Quite the opposite, there’s potential to accelerate it.

OPI: Talking about large dealers, I haven’t seen WB Mason here at the event and there have been rumours that all is not well in your relationship.

HD: I wouldn’t read anything into that. WB Mason is our single-largest customer and we have a strong relationship with them. We’re very well integrated from a supply chain network standpoint, as we are with all our big customers, and that’s the way it should be.

OPI: It’s difficult to have a conversation in this industry without Amazon cropping up sooner or later. One leading independent you know very well recently told us he thought Amazon Business was the biggest threat to the survival of the independent dealer channel in the past 40 years. Would you agree with that sentiment?

BA: When you look at office products and jan/san today, it’s a $65 billion market. I believe Amazon Business will win its share, but I also think that independent dealers can do quite well.

It will take three things: customer service, high-touch delivery and the right cost of goods. Essendant can help with all of these.

OPI: But Harry, you said just yesterday here at CORE Live that “Amazon is more than a competitor. Amazon is a habit”…

HD: They are and they do some great things and have some fantastic technologies, but they’ve got weaknesses as well. Millennials, for example, like local companies, they like people that give back, they like the high touch.

Everybody has their weak points and I think as a good competitor you capitalise on your own strengths and exploit others’ weak spots.

Independents still provide a point of differentiation in the marketplace today. And if they can at least be competitive on their digital experience, there are a lot of services they can provide that Amazon would still struggle with – just think furniture installation, jan/san-related chemical mixtures, floor cleaning…

Every industry goes through cycles where there’s a new inflection point. Just think back to the 1990s when the omnichannel players became huge. Everybody predicted the death of the independent dealer channel. They weathered the storm then and I believe the best dealers in the market today will weather this storm as well – by modifying their business models to meet customer needs in order to stay relevant in the marketplace.

OPI: Let’s talk about the dealer groups. There’s always been some friction between these groups and wholesalers because both are occupying this middle territory that revolves around services, marketing programme, etc. Do you think there is a healthy divide or is there too much blurring of the lines?

BA: I actually think the relationship is healthier than it’s been, certainly less contentious than when I joined Essendant as a board member six years ago. Both Independent Stationers and TriMega and the two Mikes who lead those groups know redundancies in the supply chain don’t make sense, and they’re very open to getting alignment around what we do really well and what they do really well.

These are times when you’re fighting for survival and you’ve got to think outside the box. Both groups I believe are willing to do that and it’s created some good dialogue between us.

OPI: Thinking outside the box, redundancy in the supply chain could also perhaps mean too many wholesale players? What’s your view on the desirability of, or potential for, consolidation among the wholesaler/distributor community?

BA: I’ve spent a lot of time thinking about how we can keep the independent dealer channel healthy and vibrant over time and I believe we have a core set of strategies at Essendant that will allow us to do that.

All I can say is that consolidation will play a role in this industry over time, but it’s difficult to predict exactly how that would shake out.

OPI: I cannot come to the US and not talk about your new President. What will the Trump administration mean for the industry here in the US and in particular for organisations like Essendant and the community that you serve?

BA: It’s early days still, but I hope that the Trump administration concentrates on a couple of real issues that are inhibiting growth in business in the US. If we can start to reduce some of the regulatory burdens and drive corporate tax reform, for example, it could have a real impact on the US economy.

It’s a question of whether the Trump administration will bring the focus on the issues that would enable our country to create jobs. If we can create jobs, it will be good for our industry.

OPI: What keeps you two awake at night?

BA: This is an industry in transition and in which models have to change – and quickly. The impact that Amazon will have on our industry is real. But we can all be successful in the face of that if we’re willing to make the changes to our business model necessary and if we can move with the speed that is required.

HD: And when we talk about change, it’s not just a couple of little things here and there, it’s transformative change. For the independent dealer channel it means really thinking outside the box and putting aside the traditions that we once had, about the historic role of the wholesaler or the role of the dealer or distributor, and so on.

I believe many dealers are getting it and are ready for it, but I do lose sleep over some stragglers that don’t seem to be ready to jump yet. What our distributors and dealers can bring to the table is a differentiated value proposition that can win in the marketplace, but there has got to be transformative change.

Like Bob said, it’s a $65 billion market and there’s plenty of share to be had by independent dealers.

OPI: I look forward to coming back in a couple of years and finding out how well you’ve done!